Business tax reform hits the wall

Treasurer Wayne Swan said it was disappointing that agreement could not be reached within the business community about how a company tax cut could be funded . Photo: Glenn Hunt

Katie Walsh and Gemma Daley

Chanticleer | Tax reform, especially narrowly focused efforts such as this, have a history of failure. That will remain the case as long as reform is inextricably linked with federal budgetary cycles.

Editorial | The primary reason the working group could not find a workable plan is that business doesn’t trust this Labor government not to dud it.

The Business Council of Australia has blamed ground rules set by Treasurer Wayne Swan for the failure of a business group set up to negotiate the government’s promised corporate tax cut.

The Business Tax Working Group said in a report last night it could not reach agreement on a way to cut the 30 per cent corporate rate.

The business leaders and union representative responsible for finding a way to lower the corporate tax rate failed to break an impasse over which concessions to cut, making any tax relief for business unlikely before next year’s federal election.

The group said it “was unable to recommend a revenue-neutral package to lower the company tax rate”.

The release of the draft report was rushed through earlier than expected, raising concerns from some members of the nine-person group, which is led by former KPMG NSW chairman Chris Jordan.

Business Council of Australia president Tony Shepherd said the rules set for the group made its task impossible.

“The Business Council was always of the view the terms of reference given to the group made it hard to produce an outcome that made good overall economic sense,” he said.

Last Thursday, Treasury’s head of revenue, Rob Heferen, said publication of the group’s report was imminent. What followed was days of round-robin emails, as members of the group debated over minor details and wording in the report.

Even though they disagreed over the timing and some of the details, they agreed on the conclusion: a company tax cut was desirable but there was no consensus in the business community on how to pay for it.

Mr Jordan declined to comment.

Little support for ending tax breaks

The report said a 1 percentage point cut would be good for the economy, wages and individuals but it was difficult to find support to end business tax breaks. It argued a cut to as low as 27 per cent was needed to make much of a difference to business investment.

One of the concessions on the table was a break for mining exploration and capital-intensive resources projects.

“The Business Tax Working Group process was flawed from the outset and this is an appropriate outcome,” said Minerals Council of Australia chief executive Mitch Hooke.

The government’s plan to cut the corporate rate to 29 per cent as part of the minerals resource rent tax was blocked by the Greens and the Coalition. Mr Swan set up the group in October, 2011, to negotiate a deal with business to find another way to pay for the cut. His primary requirement was that a tax cut had to be paid for by an equivalent increase somewhere else.

The group focused on four parts of the tax system: depreciation benefits for oil, gas, petroleum, agriculture and transport; deductions for mining prospecting; the research and development incentive; and the thin capitalisation rules, which stop multinationals artificially diverting profits overseas.

In last night’s report, the group argued cutting the tax breaks would reverse recent government decisions and remove long-standing tax treatments or significantly affect small groups of taxpayers.

Changes to depreciation could have a significant impact on the after-tax return on investment, particularly where there was a long lead time before income was produced, as is the case with gas pipelines. Billions of dollars of investment in resources could be jeopardised if there were tax changes, it said.

This week’s Mid-Year Economic and Fiscal Outlook said more than $260 billion of resource investments had been approved and most were under construction.

The group, in eight findings, said a lower rate would, in the longer term, lead to improved productivity and higher wages and its paper should be used to discuss broader tax reform.

The corporate tax rate should fall if “economic and fiscal circumstances permit” the report said, but noted a 1 percentage point reduction would not be as big as cuts in the 1980s and 1990s.

Impossible Task

Shadow Treasurer Joe Hockey said the group was set an impossible task.

“A genuine company tax cut is one funded from savings in the budget not by raising other taxes to pay for it,” he said.

The failure of the group is another blow to business, which this week was told companies with revenue of more than $20 million a year will have to pay tax every month instead of every quarter.

The government will collect an extra $8.3 billion over four years from the change.

BHP Billiton, Rio Tinto and Xstrata have cut jobs as slow global growth and high Australian business costs have contributed to a 9 per cent fall in resources and energy exports this year.

Australian Industry Group chief executive Innes Willox said he was happy tax concessions for research and development weren’t cut. The lobby group was represented on the committee.

“We need to look more broadly and more fundamentally at our tax system to find ways to finance cuts in our company tax rate,” he said.

“no appetite for giving up important tax arrangements”: EVANS

The Australian Chamber of Commerce and Industry public policy director Greg Evans said that there was “no appetite for giving up important tax arrangements” with only an outside chance of a company tax cut.

The Business Council said the report highlighted it was not the time to remove concessions to fund a tax cut, given significant economic uncertainty and major economic shifts here and abroad.

It called on the government to commit to a reduction in the corporate rate to 25 per cent.

The business lobby groups were among the 82 entities which made submissions to the working group. Most strongly rejected one or all of the options on the table.

Sources say some group members wanted the various reasons why business was against cuts fleshed out in the report. That idea, which could have contributed to public debate about why the committee failed to find agreement, was stymied by the hurried release.

Energy giant Chevron said removing the tax breaks would erode competitiveness and hurt investment. CSL, Roche, Janssen, Ausbiotech and Medicines Australia were among the many that opposed R&D cuts. NSW Farmers wanted to keep fast write-offs for farm equipment.

BP and the Institute of Public Accountants wanted a wider community debate on the tax mix, to include goods and services tax and inefficient state taxes. The politically sensitive GST was excluded from the group’s remit.

The Australian Chamber of Commerce and Industry rejected any cuts at all and wanted the government to reduce spending.

Not all voices were opposed

Not all voices were opposed. The Australian Bankers’ Association supported R&D cuts, reduced write-offs and lower deductions.

The Institute of Chartered Accountants said it might support R&D cuts for big businesses, where there was evidence that the benefit had less of an impact.

The Tax Institute indicated it would support reducing “overly generous” debt deductions for foreign investors.

Mr Swan said last night: “The government remains supportive of a lower company tax rate if consensus can be reached at some time in the future about how it will be funded from the existing business tax system.”